Municipal Financial Empowerment

Municipal Financial Empowerment:

A Supervitamin for Public Programs

Strategy #3: Integrating Safe and Affordable Bank Accounts

Municipal Financial Empowerment: A Supervitamin for Public Programs

Strategy #3: Integrating Safe and Affordable Bank Accounts

New York City Department of Consumer Affairs Office of Financial Empowerment Michael R. Bloomberg Mayor Jonathan Mintz Commissioner September 2012 ? 2012. New York City Department of Consumer Affairs. All rights reserved.

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Acknowledgments

The Department of Consumer Affairs Office of Financial Empowerment (OFE) gratefully acknowledges the many financial institutions, City agencies, and other partners, which have been instrumental in helping to integrate safe banking initiatives into multiple City social service programs.

We greatly appreciate the enthusiastic cooperation and energetic approach to account openings and ongoing data collection of the following financial institution partners who worked with us to provide appropriate products that met our needs and the needs of New Yorkers: Amalgamated Bank, Bethex Federal Credit Union, Brooklyn Cooperative Federal Credit Union, Capital One Bank, Carver Federal Savings Bank, CheckSpring Bank, Citibank, Cross County Savings Bank, Flushing Bank, Habib American Bank, Lower East Side People's Federal Credit Union, JPMorgan Chase, M&T Bank, Municipal Credit Union, New York Community Bank, Neighborhood Trust Federal Credit Union, Popular Community Bank (formerly Banco Popular), Ridgewood Savings Bank, Sterling National Bank, and Union Settlement Federal Credit Union.

Without our City agency partners, implementation of our banking initiatives would not have been possible. We thank the following for working with us so closely on these innovative approaches: Department of Parks & Recreation, especially the team at Parks Opportunity Program (POP); Office of Payroll Administration; Mayor's Office of Operations; Administration for Children's Services; Department of Citywide Administrative Services; Department of Sanitation; Department of Environmental Protection; Department of Education; Department of Homeless Services; Human Resources Administration; Department of Transportation; Department of Information Technology & Telecommunications; Department of Youth and Community Development; New York City Fire Department; New York City Housing Authority; and New York City Police Department.

The Department of Consumer Affairs' talented staff members who are dedicated to our financial empowerment work and have contributed to this report include: Cathie Mahon, Deputy Commissioner for Financial Empowerment; Tamara Lindsay, Deputy Director of OFE Programs and an author of this report; Mitchell Kent, Director of Legislative Policy and Special Counsel; I-Hsing Sun, Director of OFE Programs; Nathalie Gons, Director of OFE Research and Evaluation; and Monica Copeland, Program Officer for Financial Services and Asset Building.

Finally, we deeply appreciate the ongoing support and encouragement of Mayor Michael R. Bloomberg, First Deputy Mayor Patricia E. Harris, Deputy Mayor for Health and Human Services Linda I. Gibbs, Center for Economic Opportunity (CEO) Executive Director Kristin Morse, and former CEO Executive Director Veronica M. White. They continue to hold our Department and our programs to the highest standards of excellence.

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Supervitamin Effect in Brief . . . . . . . . . . . . . . . . . . . . . . 7

I. Why Bank Accounts Matter . . . . . . . . . . . . . . . . . . . . . . 8 II. Lessons from the Field: Designing Accounts Despite Challenges . . . . . 9 III. Supervitamin Integration: Access to Banking as the Foundation for Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . 11 IV. Implications for the Future . . . . . . . . . . . . . . . . . . . . . . 14 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Introduction

This report, the third in a series about the "supervitamin" effect of improved social service outcomes when integrating financial empowerment and asset building strategies into public programs, details New York City's efforts to increase access to safe and affordable banking accounts.

When Mayor Michael R. Bloomberg launched the Office of Financial Empowerment (OFE) at the Department of Consumer Affairs (DCA) as part of his Administration's broader antipoverty efforts, it was with the intention to educate, empower, and protect New Yorkers to improve their financial stability so they and their families could get ahead.

Access to savings and affordable banking accounts are fundamental components of consumer empowerment, self-sufficiency, and poverty alleviation strategies. In a recent report the Federal Deposit Insurance Corporation (FDIC) found that nearly 20 percent of U.S. households with low incomes do not currently have a banking account.1 Through research that OFE commissioned, we found that 825,000 adults in New York City do not have a banking account.2 Reaching the unbanked has been a Bloomberg Administration priority because a lack of banking access is linked with poverty. With only alternative financial services as an option, the unbanked must pay to access their own money, are charged for every transaction, and have limited opportunities to save money. An OFE study revealed that New York City residents spend approximately $225 million on check cashing fees alone, not counting the cost of money orders, bill paying, wire transfers, etc.3

Breaking this costly reliance on alternative financial services is a cornerstone of OFE's work because having a mainstream banking account is the only way to access formal savings opportunities. As research has demonstrated, savings and asset building are critical steps toward stabilizing finances and securing a more sound financial future.4 Creating a pathway to banking helps individuals to successfully navigate the financial system, with the end goal of enhancing their ability to build savings and assets. Ultimately, we want to ensure that households with low incomes keep every single dollar they earn and receive.

As traditional social service providers look for ways to enhance efforts to meet clients' needs, prioritizing access to a banking account and services can make a difference by providing the necessary financial foundation for clients to be more self-sufficient, while also enhancing the work of the host program. Particularly in programs that incorporate recurring flows of funds to participants, the financial stability boosted by bank accounts also bolsters impact and outcomes of the host program: the supervitamin effect.

Spotlight: Safe and Affordable Banking Products Negotiated by OFE

By addressing key customer concerns, leveraging OFE research findings, and making account terms palatable to a sufficient number of mainstream banking institutions, OFE has introduced a number of safe and affordable banking products over the last few years.

Opportunity NYC Account/NYC SafeStart Account: Originally designed for individuals enrolled in New York City's conditional cash transfer pilot, the Opportunity NYC Account served as a launching pad for the NYC SafeStart Account, a safe starter bank account available to all New Yorkers. The NYC SafeStart Account has very low minimum balance requirements, ATM-only access to funds, no monthly fees, no overdraft fees (notably before the federal regulation prohibiting these fees), and allows multiple payers to directly deposit funds. Participating financial institutions also agreed to leniency regarding prospective account holders' poor checking account histories (ChexSystems) that did not involve fraud and agreed to provide data to OFE.

NYC First Account: Recognizing the potential of working with participants in the City's Summer Youth Employment Program (SYEP), OFE negotiated a more full-featured account with partner financial institutions. This account included a debit card with VISA or MasterCard logos that account holders could use either as a PIN-based debit or signature-based credit card.

NYC Direct Deposit: The goal of NYC Direct Deposit, OFE's latest program, is to increase the number of City employees who directly deposit their pay. City employees can access a completely free checking account through one of seven partner financial institutions ... as long as they directly deposit their pay. The accounts have no monthly fees, no minimum balance requirements, and no marketing of courtesy overdraft.

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The Supervitamin Effect in Brief

As described in our first two supervitamin reports, financial stability is overall economic security that can sustain an individual or family for months and years, not just days and weeks. Income and income supports such as housing subsidies and public benefits are necessary but not sufficient for overall financial stability. A household also requires financial knowledge and access to affordable financial products and services to build cushions against financial shocks and downturns. It is the integration of financial stability programming into other programs that provides the supervitamin effect, boosting the effectiveness and improving the outcomes of traditional social service programs at a time when antipoverty efforts are being pressed to do the proverbial "more with less."5 Reports #1 and #2 focused, respectively, on integrating professional financial counseling and professionalizing the field of financial education and counseling. This third report focuses on the insertion of safe and affordable banking accounts into existing social service programs to facilitate payment to target populations that are highly unbanked. The crux of this idea is that the primary program outcomes--whether they are employment re-entry programs, disability payments, or payments to directly assist families with low incomes--will be enhanced by inserting a safe and affordable banking account. The insertion of a bank account has its maximum impact as a supervitamin for public programs when four key lessons learned are observed:

? Lesson1: Identify program partners who recognize that supervitamin interventions would benefit their program participants

? Lesson 2: Identify programs with participants who are most likely to be unbanked ? Lesson 3: Identify programs that push out funds, particularly through recurring payments ? Lesson 4: Take advantage of the enrollment structure of the program

Beyond Rhetoric: Most Frequently Cited Reasons for Being Unbanked

? Do not have enough money: 50 percent ? Lack proper identification: 14 percent ? Lack time to open an account: 14 percent ? Bank fees are high and/or hidden: 12 percent ? Do not understand the banking system: 10 percent ? Prefer anonymity of check casher: 6 percent ? Do not trust the banking system: 4 percent ? Listed on ChexSystems: 2 percent Source: Slipping Behind, Pew Health Group

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I. Why Bank Accounts Matter

Studies show that being "banked"--or using a bank account--is associated with, and may even lead to, increased financial stability.6 Those with mainstream accounts, as compared to those without, tend to keep more of their earnings, fare better against financial shocks, and save more. Multiple sources have concluded:

? Those who are unbanked have lower median household incomes and are more likely to live in poverty compared to those with bank accounts.7

? Those who are unbanked are less likely to be employed than their banked counterparts.8 ? Those who are unbanked are more likely to use high-cost loans.9 ? Those who are banked are better able to pay their bills and save for the future.10 ? Those with bank accounts are more likely to save and sustain their savings behavior.11

Lack of banking access is also tied directly with poverty. As described in the Introduction, nearly 20 percent of U.S. households with lower incomes--nearly seven million households--lack a banking account, according to a recent FDIC report. Of these unbanked households, about 66 percent rely heavily on fringe financial services such as check cashers, or they simply transact with cash. In New York City, 825,000 adults do not have a banking account, with high numbers of these individuals concentrated in just 10 traditionally low-income neighborhoods, according to research commissioned by OFE.12

Depositing and managing money through a mainstream bank account provides households with low incomes with better opportunities both to save and access credit vehicles. OFE's Neighborhood Financial Services Study found a close linkage between holding a bank account and having formal savings; only four percent of those lacking a bank account have any retirement savings, while 31 percent of those with bank accounts have such savings. The study found that savings is linked to overall financial stability with "saver" households being roughly one-half as likely to experience financial instability, compared to their non-saver counterparts. And, with a heavy reliance on costly and predatory alternative financial services such as expensive and unnecessary tax refund-related products, high-fee check cashers, debt relief scams, highand hidden-fee prepaid cards, and money orders, unbanked individuals are more susceptible to theft and are unable to find safe ways to save money.

For some unbanked individuals, declining to open a bank account is connected to previous negative experiences or fears about the application process. Studies cite the following reasons that individuals remain unbanked: having inadequate funds to warrant a bank account; mistrust of being banked based on past negative experiences; and the fear of garnishments. A significant percentage of the unbanked--49 percent, according to the FDIC report--were banked at one time.13

Unbanked individuals can greatly benefit from financial services offered by banks, such as free bill pay, linked savings accounts, and the ability to transact easily without reliance on cash. Individuals without accounts pay a high price, measured as a proportion of earnings, for the fringe services they use instead. The challenge is to find ways to address this dichotomy between a more stable financial outlook when using a banking account and the very real reasons people remain unbanked.

OFE's Priority Features for Safe and Affordable Checking Accounts

Fees ? Reasonable monthly maintenance or service fee (to

date, under $5) ? Free use of in-network ATMs to deposit or withdraw

funds, or to check account balances ? No fees to use debit card ? No overdraft option for debit card purchases or ATM

withdrawals

Minimums and Transactions ? Low minimum balance and initial deposit requirements ? Multiple ways to check account balance for free (online,

by phone, through text messages, at ATMs) ? Waived monthly fee for reasonable transaction require-

ments (i.e., direct deposit or five combined point of service and ATM transactions)

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